This is the fourth in our series on foreclosures written by Stan Galbraith of Galbraith Law. The previous parts in the series were Foreclosures Part 1, The Redemption Period and Court Ordered Sale.
Mortgage Insurance
The only time the courts issue an order for foreclosure is when there is little or no equity in the property. Even then, it is only done when the lender requests it and most times they would rather have the property sold under the court process. First, most lenders are not in the business of owning real estate. Second, they require a sale so they can quantify their shortfall, if any. This allows them to make a claim under the mortgage insurance policy.
Any time an owner obtains a high-ratio mortgage from a bank or other public lender they must pay for mortgage insurance. A high-ratio mortgage is defined as the mortgage for in excess of 75% of the value of the property. The mortgage insurance is there for the protection of the lender, not for the protection of the owner. In the event of a foreclosure and a sale by the bank at a loss (after payment of the mortgage, all interest, any real estate commissions and all costs of the foreclosure process) the bank will make a claim under the mortgage insurance policy. The bank will recover their loss and break even.
The mortgage insurance company will then seek reimbursement from the property owner for the amount they have paid out to the lender. Although liability under a mortgage does not continue once the property is sold, liability under the mortgage insurance policy does continue. In other words, if someone sells a property and the new owner defaults on the mortgage the original owner can end up with a judgment against them for the full value of the lender’s loss.
In the early 1980s many people in Alberta ended up with a judgment against them for thousands of dollars. This was especially painful where they had sold the property with the belief and understanding the new owner would look after the mortgage. In one case, I dealt with a client facing a judgment in excess of $15,000. They had sold the property to new owners who had subsequently resold the property to a third party. The final owner defaulted and left the property in a mess. The lender sold the property at a loss and obtained judgment against six people; all three couples who had owned the property since the mortgage was granted. The mortgage insurance company went after the first owners as they had the greatest ability to pay the judgment.
About the author: Stan Galbraith is a lawyer with over 25 years of experience. He was admitted to the Alberta Bar in 1983 and has operated his own law office since 1988. Stan has a wealth of experience ranging from litigation and appeal work, to teaching and writing. He has now left the world of litigation behind and works with commercial and residential Realtors and their clients on closing their transactions. He also practices extensively in the areas of small business and wills and estate planning and administration. You can find his website at www.galbraith.ab.ca.
